1. Victoria STEPHEN August 17, 2017
Fair Lending
Victoria STEPHEN
August 17, 2017

2. Agenda Overview of Fair Lending Laws Compliance Management System
Risk Indicators & Risk Mitigation
Hot Topics & Enforcement Actions
Question & Answer

3. Overview

4. Overview Fair Lending Laws & Regulations Prohibited Bases
Types of Discrimination

5. Overview: Fair Lending Laws
Equal Credit Opportunity Act (ECOA)
Fair Housing Act (FHA)
Apply to banks and any third parties with whom the bank contracts.
Apply to all phases of the lending process.
Include extensions of credit to corporations, partnerships, trusts, etc.

6. Regulations: Equal Credit Opportunity Act (ECOA)
Regulation B, CFPB Part 1002
Prohibits discrimination in any aspect of any credit transaction.

7. Regulations: Fair Housing Act (FHA)
FDIC 12 CFR 338 & HUD 24 CFR 100
Prohibits discrimination in all aspects of “residential real-estate related transactions.”
Examples (not exhaustive):
Making loans to buy, build, repair, or improve a dwelling;
Purchasing real estate loans;
Selling, brokering, or appraising residential real estate; or
Selling or renting a dwelling.

8. Prohibited Bases: Comparison
ECOA
FHA
Race
Color
Religion
National Origin
Sex
Marital Status*
Handicap*
Age*
Familial Status*
Receipt of income from public assistance program*
Exercise of rights under Consumer Credit Protection Act or state law*

9. Types: Disparate Treatment - Overt
Lender openly discriminates on a prohibited basis
Note: Includes lender expression of discriminatory preference even if the lender does not actually act on the expressed preference.
Example: An MLO tells a customer, “We do not like to make home mortgages when a woman is the only borrower, but the law says we cannot discriminate and so we have to comply with the law.”

10. Types: Disparate Treatment - Implied
Lender treats applicant differently based on one or more of the prohibited bases.
Note: Implied disparate treatment does not require a conscious intention to discriminate beyond treatment itself.
Example: Two individuals with same credit issues submit applications. Lender discusses credit report with non-minority applicant, identifies error in the report, and grants credit. Lender then denies minority applicant with no opportunity to discuss potential credit report error.
Borrower
Loans
Avg. Int. Rate
Minority 20
15%
Non-minority 30 5%

11. Types: Disparate Impact
Neutral policy or practice that is applied equally, but disproportionately excludes or burdens persons on a prohibited basis
Three-step analysis:
Disproportionately burdens persons/groups on prohibited basis?
Justified by “business necessity”?
Alternative policy/procedure available with no or less discriminatory effect?
Example: Lender’s policy prohibits single-family residential loans for less than $200,000.

12. Compliance Management System

13. CMS: Oversight Purposes:
Set out compliance program
Show commitment to Fair Lending compliance
Duties can be delegated, but Board is ultimately responsible for compliance
Board and Management oversight
Fair Lending risk assessment
Be familiar with products and services
Be aware of lending data

14. CMS: Program Policies and Procedures Training Monitoring
Lending and Fair Lending policies
Practiced procedures
Training
Board, management, and staff
Monitoring
Ongoing and periodic monitoring processes

15. CMS: Audit Very much based on individual risk
Periodic Fair Lending audits
Self-evaluations
Self-tests
If implemented:
Report results to Board
Implement follow-up processes
“A self-test is any program, practice, or study that:
Is designed and used specifically to determine the extent or effectiveness of a creditor's compliance with the Act or this part; and
Creates data or factual information that is not available and cannot be derived from loan or application files or other records related to credit transactions.”

16. Risk Indicators & Mitigation

17. Risk Indicator: Overt Indicators
Specific mention of a prohibited basis group
Including variables in credit scoring system that rely on prohibited basis
Making statements (employees or agents) reflecting discrimination or attitudes based on prohibited bases
Example:
Account X (anyone of legal age)
Account Y (50 and older)
$10 service charge, no minimum balance
$200 overdraft protection
5% HELOC interest rate
4% HELOC interest rate

18. Risk Mitigation: Overt Indicators
Review new or amended policies for compliance with fair lending laws
Establish/ evaluate internal controls, including monitoring
Train staff involved in any aspect of lending on both the fair lending laws and the bank’s lending policies
Clearly communicate responsibilities and expectations to ensure consistency across the bank

19. Risk Indicator: Underwriting Indicators
Significant denial rate disparity on prohibited bases
Vague terms for underwriting standards
High rate of exceptions to policy
Limited to no documentation in loan file to support decisions.
Example: Maximum DTI of 36%
Approved
Denied
Female
25 of 50
Male
10 of 50
40 of 50

20. Risk Mitigation: Underwriting Indicators
Develop specific and objective underwriting criteria to ensure the bank (and third-party underwriters) consistently apply underwriting policy
Implement policies and procedures requiring loan officers to document credit decision in loan files
Review policy exceptions and evaluate whether loan officers document exceptions and the reasons they were made.
Perform comparative file analysis of denials and approvals.

21. Risk Indicator: Pricing
Broad discretion in pricing, including rates and fees
Disparities in rates and fees on prohibited bases
Risk-based pricing without objective criteria
Risk-based pricing applied inconsistently
Disparities in rate spreads (HMDA data)
Example: Brokers
Example: Auto Dealers

22. Risk Mitigation: Pricing
Monitor loan pricing to identify possible pricing disparities and rate sheet deviations
Monitor broker lending patterns and compensation
No rate sheet:
Internal controls
Regular monitoring and training
Clearly communicate responsibilities and expectations
Appropriate loan documentation in either case
Focus pricing reviews on discretion allowed and determine whether controls are adequate to mitigate level of lending risk.

23. Other Indicators
Redlining
Steering
Marketing

24. Indicator: Redlining Form of illegal disparate treatment
Bank provides unequal access to credit or unequal forms of credit because of a prohibited basis based on where the applicant resides.
Reverse Redlining: targeting certain borrowers or areas with less beneficial products or services based on prohibited characteristics.
Like any other disparate treatment, Redlining can be proven with either overt or comparative evidence.

25. Indicator: Steering
Increased products and/or channels increases risk that applicants will be illegally steered into certain choices based on prohibited characteristics rather than the applicants’ needs.
Note: financial harm need not occur. It is sufficient that the action was taken on a prohibited basis.

26. Indicator: Marketing
Marketing efforts show clear decisions to include or exclude certain areas.
Marketing patterns, generally, will either support or contradict the case that disparities in other lending practices were intentional.
Note, however, that marketing can rise to the level of being an indicator in itself. If there is enough evidence, marketing to clearly racially different areas, for example, could itself be treated as a redlining violation.

27. Hot Topics & Enforcement Actions

28. Hot Topics: Redlining
Whether lenders have intentionally discouraged prospective applicants in minority neighborhoods from applying for credit.
“…a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located.”

29. Hot Topics: Redlining Strength of CMS;
Unique attributes of relevant geographic areas;
Lending patterns ;
Physical presence;
Marketing;
Mapping;
Peer and market comparisons;
CRA assessment area and reasonably expected market area (REMA);
Lending policies and procedures record;
Additional evidence; and
Explanations for apparent differences in treatment.

30. Hot Topics: Small Business Lending
Concern that women-owned and minority-owned businesses may experience discrimination when applying for credit.
Section 1071 of the Dodd-Frank Act requires financial institutions to track and report applications made by women-owned, minority-owned and small businesses.
05/15/2017: CFPB published a Request for Information asking for feedback to help develop implementing regulations
Original comment period was July 14, but was subsequently extended 60 days to September 14.

31. Hot Topics: Small Business Lending
Small Business definition
Data Points
Institutions Engaged in Business Lending
Access to Credit and Financial Products
Privacy

32. Hot Topics: Mortgage and Student Loan Servicing
Whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a new solution with the servicer because of their race, ethnicity, sex, or age.
Areas of concern: misusing escrow funds, vague periodic statements, deceptive statements about interest capitalization during deferment, erroneous deferment terminations, among others.

33. Hot Topics: Limited English Proficient (LEP) Consumers
ECOA requires “the fair, equitable, and nondiscriminatory access to credit” and promotion of “the availability of credit.” Accordingly, CFPB continues to encourage lenders to provide assistance to LEP consumers.
Issue: Marketing only some of their available credit card products to Spanish- speaking consumers, while marketing several additional credit card products to English-speaking consumers, without adequate documentation.
Mitigation: Revise marketing materials to notify consumers in Spanish of availability of other credit card products and include clear and timely disclosures to prospective consumers describing the extent and limits of any language services provided throughout the product lifecycle.
Synchrony Bank enforcement action

34. Enforcement Actions BancorpSouth Bank (June 29, 2016) Redlined
Discriminated in underwriting
Discriminated in pricing
Implemented directly discriminatory denial policy

35. Resources
Revised FFIEC Interagency Fair Lending Examination Procedures
FFIEC Interagency Fair Lending Examination Procedures Appendix
Equal Credit Opportunity Act
Regulation B, 12 CFR 1002
Fair Housing Act
12 CFR 338, Fair Housing
24 CFR 100, Discriminatory Conduct Under the FHA
CFPB Fair Lending Report
Compliance Alliance Fair Lending Toolkit

36. Questions?
Thank you for your participation! We hope you found value in the presentation. If you have any additional questions, contact Compliance Alliance at or